Why an 84 month car loan is a waste of money
Imagine buying a new car, getting the keys, signing a finance agreement, and then realizing you’ll still be making payments seven years later.
It’s a real possibility, as more car dealers and lenders offer 84-month car loans.
A seven-year loan may seem like a great option; after all, a longer term means a smaller monthly payment.
But that doesn’t make it a good idea. Here’s what you need to consider before getting an 84 month car loan.
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Why consider an 84 month auto loan
Loans seem more affordable
For many years, the longest car loan most lenders considered was 72 months, or six years.
The new 84-month loans tempt borrowers with even smaller payments over an even longer term.
This may seem very appealing if you are on a budget and cannot afford the repayments of a shorter term loan.
You would have more money to invest
The smaller payments with an 84 month car loan theoretically frees up money that you could spend on other uses.
The idea makes sense if you are convinced that your investments will earn you a higher return than the interest on the loan.
But don’t leave it simple possibility fool you by choosing an 84-month car loan. If you don’t actually invest more, you just suffer the inconvenience of a longer loan for no reason.
Disadvantages of an 84 month car loan
You’ll pay a ton more interest
Although an 84 month loan means a smaller payment each month, your total interest will be higher because you will be paying interest for longer.
And a seven-year loan usually carries a higher interest rate than a shorter-term loan.
Let’s take a look at what your monthly payment could be on a $20,000 loan based on your term length, assuming you have excellent credit.
Now let’s see how much interest you would pay in total for each of these terms.
As you can see, the monthly payment on a 60 month loan is about $100 more per month than the monthly payment on an 84 month loan, but you’ll save $1,200 in interest over the life of your loan. .
You can always try to pay off an 84 month loan early to lower your total interest, but many lenders charge a prepayment fee for paying off your loan early, so it might not be worth it.
If you really need a seven-year loan to buy your dream vehicle, consider that a sign that it’s well outside your price range.
You might find yourself upside down on the loan
Unlike a house, vehicles almost never increase in value over time. Committing to long-term financing is therefore not a good idea.
New cars lose about 23.5% of their value after one year and about 60% after five years, according to automotive site Edmunds.
Your car will likely depreciate faster than you can pay it off, leaving you upside down on your loan. In other words, if you were to sell the car for market value before the end of your 84-month loan term, you would still owe your lender money.
And if you have an accident before your car is fully reimbursed, your insurer may only cover the market price of the car, which will likely be less than you owe.
Even if your car is depleted and can’t be driven, you may still have to pay your monthly payments until your loan is paid off.
You could be caught in a negative stock market cycle
If you decide to trade in your car before your 84 month loan is paid off, you could be caught in what is known as a negative equity cycle, in which you owe more each time you take out a new loan. .
Let’s say you buy a car for $20,000 on an 84 month finance plan at 4.6%, like our example above, and your monthly payment is $296.23.
You drive it for four years, then decide to trade it in for a new car that costs $25,000. Because you took out an 84-month loan, you still owe $10,664.28 on your trade.
However, your car has depreciated since you bought it and you’ve put a fair amount of miles on the odometer, so your trade-in is only worth $8,000.
You now have $2,664.28 of negative equity, which means you will need to borrow $27,664.28 for your new car. With the same 84 month loan, your new monthly payment will be $409.53.
If you do the same with your subsequent cars and trade them in before the end of your loan term, you will continue to accumulate negative equity and your debt will only grow.
Your warranty will expire first
A big selling point on new vehicles is the warranty that covers repairs in the first few years.
However, most warranties don’t last seven years, and as your loan ages, your vehicle will likely need more complex and expensive repairs.
This means you’ll pay for repairs out of pocket while you’re still paying for your car.
And if you buy a used car, the chances of it needing serious repairs before the end of an 84-month loan are even higher.
For example, if you buy a five-year-old car with an 84-month loan, it will be 12 years old by the time your loan is fully paid off.
Even if you spend a lot on repairs, your five-year-old car may not be drivable before the end of your 84-month loan term.
Alternatives to 84 month loans
There are several alternatives to taking out an 84 month loan that may be a better option for you:
Look for refinancing
If you’ve already taken the plunge and secured an 84-month loan, don’t panic.
As long as you have a decent credit score, you may be able to refinance your loan for a shorter term with a better rate.
Don’t buy, rent
If you’ve got your heart set on a car that’s not in your price range, your best bet might be to lease it instead of buying it.
Leasing often requires a lower monthly payment because payments are based on the depreciation of the car during the lease period instead of the list price.
And if you decide you still want the car at the end of your lease, you’ll have the option of buying it for an amount stipulated in your contract.
Save for a larger down payment
Instead of immediately jumping into a long loan, you could spend time building up your savings, ideally in a high-yield account.
This way, you can make a larger down payment and take out a smaller loan with a lower monthly payment.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.